Business Taxes

Written By Attorney Michelle Wynn on 2/25/17

Attorney Michelle Wynn is no stranger to helping businesses struggling with tax debts of many different types. Below you will find additional information about the different types of tax liabilities businesses can encounter. You will also see below that often a business tax liability can cause the business owner and sometimes managers to become personally liable for the business’s tax debt.

When a business incurs a business tax liability, it is eligible for the same general types of resolution options as individuals are.

The difference between the IRS collecting against businesses and against people is that the IRS is not required to allow any resolution option for a business. While the IRS will normally negotiate with businesses to reach a voluntary arrangement to pay back taxes, it is typically at the discretion of the Revenue Officer assigned whether to grant any sort of resolution. If a business habitually incurs tax debts or if the business continues “pyramiding liabilities,” the IRS can seize the business and sell its assets for repayment of the tax liability or it can issue levy after levy against different business assets, including accounts receivable and bank accounts, until it drives the business out of operation. Essentially, the IRS can shut down the business without ever needing to go to court.

“Pyramiding liabilities” is a term the IRS uses to indicate several different tactics it views as fraudulent in incurring business liabilities (typically payroll tax liabilities), but it doesn’t have to prove fraud in order to shut down the business for these activities. Sometimes the term “pyramiding” refers to when a business incurs payroll tax liabilities, files bankruptcy, shuts down, and then starts essentially the same business over again with a different name and does the same thing again, and again, etc. But, “pyramiding” can also refer to any time a business incurs more than one quarter of payroll tax liabilities, most commonly after it continues to incur tax liabilities after a Revenue Officer has already contacted the business about already existing payroll tax liabilities. Once the IRS has determined a business is “pyramiding” payroll tax liabilities, it can take any collection actions it deems necessary to stop the business from incurring new liabilities and, if possible in the process, collect on the debts already owed.

In short, while there are many different ways businesses can incur a tax liability, and there are several options for resolving any liabilities a business incurs, it is absolutely essential to try to get in front of the problem rather than waiting until the IRS deems that your business is too far gone to be worth saving.

Payroll Taxes

The most common form of business tax liability that we encounter is a payroll tax liability. When an employer employs employees, it is responsible for paying, and often withholding, certain types of taxes related to its employee’s wages.

Form 941 Taxes: An employer is responsible for withholding income taxes for its employee’s pay in accordance with the employee’s Form W-4 and then paying this withheld amount over to the IRS. The employer is also responsible to withhold a portion of the Social Security and Medicare Taxes that are due based on the employee’s wages and pay this amount, along with the employer’s portion of these taxes, to the IRS. These different taxes together are reported to the IRS on Form 941, Employer’s Quarterly Federal Tax Return. Employers are also responsible for making federal tax deposits (FTDs) of these amounts during the quarter, based on a schedule imposed by the IRS.

Form 943 Taxes:Form 943 taxes, Employer’s Annual Federal Tax Return for Agricultural Employees, are essentially the same sort of taxes as Form 941 taxes, but are due only from employers of agricultural employees.

Form 940 Taxes:A Form 940 is filed to report and pay Federal Unemployment Tax (FUTA Tax). Unemployment tax is not withheld from the employees’ pay. FUTA taxes can be due either during the year or when the business files its Form 940, Employer’s Annual Federal Unemployment Tax Return, depending on the amount of the employer’s FUTA tax liability.

Trust Fund Penalty:If a business fails to pay its Form 943 or Form 941 payroll taxes, the IRS may go after the business owners or “responsible individuals” for the “trust fund” portion of these taxes directly. The “trust fund” portion is the part of the Form 941 or Form 943 payroll taxes that were required to be withheld from the employees’ pay but was not paid over to the IRS. This includes any Federal Income Taxes withheld as well as the employee portion of the Social Security and Medicare taxes. This portion of the tax liability is treated as being held “in trust” for the government (even when it was never actually withheld) and this allows the IRS to take more aggressive collections stances on the trust fund taxes. There is more information about this in the
Trust Fund Recovery Penalties section of this website.

Income Taxes

Different types of businesses have their incomes taxed in different ways. A summary of these differences is as follows:

Single-Member LLCs or Sole Proprietorships: Businesses that are owned by one person, even if there is no formal business registered with the state, are considered sole proprietorships by the IRS. Typically, the income from this type of business is reported on the owner’s personal income tax return only, most often on a Schedule C. These sorts of income taxes are generally not considered business taxes but are, instead, personal income taxes owed by the owner of the company.

The sole owner of a Single-Member LLC can elect to have the business considered to be an S Corporation by filing an IRS Form 2553, Election by a Small Business Corporation. If the owner does this and the request is approved, the business would be taxed as an S-Corporation.

Partnerships: Any business activity not performed by an incorporated company (a Corporation) that has multiple owners is considered a partnership by default. This occurs even if there is no formal business entity actually formed. A formal business entity for a partnership would be a company like a multi-member LLC, an LLP (limited liability partnership), or a P.A. (professional association), for some examples.

An “accidental” partnership most often happens when multiple people decide to purchase and own a rental property together. Many times, these owners do not realize that they have actually formed a partnership by operating a profit-making enterprise with multiple owners and are thus liable to file partnership income tax returns. Under current law, spouses can be exempt from the requirement to file partnership returns for rental properties they jointly own (with no other owners).

A Partnership has to file a Form 1065, U.S. Return of Partnership Income, with the IRS each year to report its income, expenses, and any credits. However, the Partnership will not pay any income taxes. All of the partnership’s income, deductions and credits “flow-through” to the partners and the partners report these items on their own tax return and are taxed on the profits. Like a sole proprietorship, these are not business taxes but are personal income taxes owed by the owners.

If a partnership does not file its Form 1065 on time each year, it can become subject to late filing penalties which would be imposed against the partnership itself. Thus, even though partnerships do not owe any income taxes, they could have an “income tax liability” for late filing penalties.

Like a sole-member LLC, a partnership can elect to have the business considered to be an S Corporation by filing an IRS Form 2553, Election by a Small Business Corporation. If the owners do this and the request is approved, the business would be taxed as an S Corporation. The taxation of S Corporations and Partnerships are quite similar for most companies, but differ in several important respects that are outside the scope of this summary.

C Corporation: A C Corporation is the default tax classification of any company incorporated under the laws of its state (or foreign country). A C Corporation files a Form 1120, U.S. Corporation Income Tax Return, and pays income taxes on its net profits at the corporate level.

A C Corporation can file a request to be taxed as an S Corporation by filing an IRS Form 2553, Election by a Small Business Corporation. If the request is granted, the C Corporation would no longer pay taxes at the corporate level but would instead be taxed as an S Corporation.

S Corporations: S Corporations can be comprised of one owner or several owners, so long as the company meets the eligibility criteria for an S Corporation and files the S Corporation Election with the IRS. An S Corporation is the only non-default tax classification, meaning you can’t accidentally or unknowingly form an S Corporation.

An S Corporation has to file a Form 1120-S, U.S. Income Tax Return for an S Corporation, with the IRS each year to report its income, expenses, and any credits. Like a partnership, the S Corporations income, deductions and credits “flow-through” to the owners and the owners report these items on their own tax return and are taxed on the profits. Like a sole proprietorship, these are not business taxes but are personal income taxes owed by the owners. Unlike partnerships, there are certain types of “income” taxes owed directly by an S Corporation, including tax on gains from assets held by a C Corporation prior to becoming an S Corporation, and taxes on excess net passive income. An S Corporation can also develop an income tax liability by not filing its Form 1120-S on time and thus being subjected to late filing penalties, much like a partnership.

Excise Taxes

There are a number of different excise taxes collected by the Internal Revenue Service. Some excise taxes are paid when purchases are made on specific goods (such as fuel) or activities (like Indoor Tanning Service Providers). There are also excise taxes on activities such as wagering or on highway usage by trucks. Most of these taxes are collected by the seller of the good or service from the customer when a purchase is made, much like sales taxes are collected, and then reported to the IRS on the applicable excise tax return and remitted by the seller to the IRS.

When the excise taxes are of a type that are collected by the company selling the goods or services the IRS treats these as “trust fund taxes.” This excise tax liability is treated as being held “in trust” for the government (even when it was never actually withheld) and this allows the IRS to take more aggressive collections stances on the trust fund taxes when they are not paid on time. The IRS may go after the business owners or “responsible individuals” for the trust fund portion of these taxes directly. There is more information about this in the Trust Fund Recovery Penalties section of the website.